The need for conceptual framework

The concept of a 'true and fair view' is referred to as 'fair presentation' in IFRS:

'Financial statements shall present fairly the financial position, financial performance and cash flows of an entity. Fair presentation requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Conceptual Framework. The application of IFRSs, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation. An entity whose financial statements comply with IFRSs shall make an explicit and unreserved statement of such compliance in the notes. Financial statements shall not be described as complying with IFRSs unless they comply with all the requirements of IFRSs.'

Advantages of conceptual framework

(a) A consistent conceptual base should lead to standardised consistent accounting practices. (b) The development of standards is less subject to political pressure. (c) A consistent statement of financial position driven or profit or loss driven approach is used. (d) It avoids a 'fire-fighting' (or 'patchwork quilt') approach to setting standards.

Disadvantages of conceptual framework

(a) Different users have different needs. The needs of all users cannot be considered. (b) Different purposes or uses may require different conceptual bases. (c) A conceptual framework does not necessarily make preparing standards any easier, and may hamper their development.

A fair presentation also requires an entity to:

(a) Select and apply appropriate accounting policies; (b) Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and (c) Provide additional disclosures when compliance with the specific requirements of IFRS is insufficient to enable users to understand the impact of particular transactions, and other events and conditions on the entity's financial position and financial performance.

Enhancing Qualitative Characteristics

1. Comparability 2. Verifiability 3. Timeliness 4. Understandability

Limitations to Faithful Representation

1. Inherent uncertainties 2. Estimates 3. Assumptions

Conceptual framework is useful to

1.Auditors 2.Users of accounts 3.Anyone interested in how IFRS's are formulated

Faithful Representation means..

1.Substance over form Faithful representation means capturing the real substance of the matter. 2.Represents the economic phenomena Faithful means an agreement between the accounting treatment and the economic phenomena they represent. The accounts are verifiable and neutral. 3.Completeness, Neutrality & Verifiability

Liability

A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Asset

A resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity.

the principle of faithful representation

Allocating part of the sales proceeds of a motor vehicle to interest received even though it was sold with 0% (interest free) finance

Verifiability

Assures users that information faithfully represents the economic phenomena it purports to represent. Verification can be direct or indirect

Understandability

Classifying, characterising and presenting information clearly and concisely

Expenses

Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or increases of liabilities that result in decreases in equity, other than those relating to distributions to equity participants

an example of faithful representation

Derecognising factored trade receivables sold without recourse to the seller

Substance over form

IAS 8 Accounting policies, changes in accounting estimates and errors requires that an entity's accounting policies reflect the economic substance of transactions, events and conditions and not just their legal form: 'Management shall use its judgement in developing and applying an accounting policy that results in information that is ... reliable, in that the financial statements reflect the economic substance of transactions, other events and conditions and not merely the legal form.'

here are several accounting standards that address the issue of substance over form, for example:

IFRS 16 Leases IAS 18 Revenue IFRS 9 Financial instruments in respect of recognition and derecognition of financial assets and liabilities, such as loans

Income

Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

Comparability and Consistency

Information is more useful if it can be compared with similar information about: Other entities; and Other periods.

relevance

Predictive and confirmatory values are part of the fundamental characteristic of useful information

Relevance is a fundamental information characteristic

Showing discontinued operations separately from continuing on the income statement

How do you know if substance is not the same as form

Where control differs from ownership of an asset Where items are sold at NOT fair value Where there's an extra "option" in the agreement Where this is any "extra" attachment to an agreement This is called a linked transaction

Conceptual framework

a basis for resolving accounting disputes / issues

conceptual framework

a framework for setting accounting standards a basis for resolving accounting disputes fundamental principles which then do not have to be repeated in accounting standards a theoretical basis for determining how transactions should be measured (historical value or current value) and reported a statement of generally accepted accounting principles (GAAP) for evaluating existing practices and developing new ones

A conceptual framework

a statement of generally accepted theoretical principles, which form the frame of reference for a particular field of enquiry.

Rules based system

lead to more comparable financial statements between companies

Having no framework leads to 'rules- based' accounting systems

the following happens.. Inconsistent standards Standards produced on a "fire fighting" basis (Being reactive rather than proactive) Standard setting bodies are biased in their membership Same theoretical issues are repeated each time a problem comes up

purpose of the Conceptual Framework

to assist in determining the treatment of items NOT covered by IFRS.

objective of the Conceptual Framework

to facilitate the consistent and logical formulation of IFRS. The Conceptual Framework also provides a basis for the use of judgement in resolving accounting issues.

A principles based framework

would lead to more consistent accounting standards

Fundamental qualitative characteristics

For information to be useful, it must be both relevant and faithfully represented Relevance Faithful representation

faithful representation

Fundamental characteristic

Common examples of substance over form

Goods on sale or return/consignment inventories Sale and repurchase agreements Sale and leaseback agreements Factoring of receivables

Timeliness

Having information available to decision makers in time to be capable of influencing their decisions

in order to achieve 'fair presentation' under International GAAP, an entity must comply with:

International Financial Reporting Standards. These comprise: - International Financial Reporting Standards (IFRS); - International Accounting Standards (IAS); - Interpretations originated by the IFRS Interpretations Committee (IFRS IC); and The Conceptual Framework for Financial Reporting.

The purpose of a financial reporting conceptual framework

Its theoretical principles provide the basis for: 1.The development of new reporting practices 2.The evaluation of existing ones.

Equity

The residual interest in the assets of an entity after deducting all its liabilities, so EQUITY = NET ASSETS = SHARE CAPITAL + RESERVES